bankruptcy law and entrepreneurship · 2018. 5. 31. · – personal bankruptcy law believed to be...

CBR Summit: Innovation and Governance 29-30 March 2006

Bankruptcy Law and Entrepreneurship

John Armour CBR & Law Faculty, Cambridge University

Douglas Cumming Director, Severino Center for Entrepreneurship,

Rensselaer Polytechnic Institute


Motivation

• Growing salience of ‘entrepreneurship policy’– Personal bankruptcy law believed to be relevant by UK/EU

policymakers

• Reform of bankruptcy laws– 2004: Enterprise Act facilitates fresh start in UK– 2005: Bankruptcy Reform Act restricts fresh start in US

• No international study shows link between bky law and entrepreneurship across countries


What determines entrepreneurship? (1)

• Individual characteristics– Risk tolerance (Wagner and Sternberg, 2002)– Optimism (Venkataraman and Lee, 2001; Landier and Thesmar,

2003)– Wealth endowment (e.g. Blanchflower and Oswald, 1997)– Human capital (e.g. Lazear, 2002; Wagner, 2003)

• Economic factors– GDP growth (e.g. Landier, 2002; Fan and White, 2003)

• Cultural factors– Attitudes to risk (e.g. Hofstede et al, 2002)



• Regional geography– Agglomeration externalities (e.g. Saxenian, 1994)

• Fiscal regime– CGT vs income tax (Poterba, 1989a,b; Gompers and Lerner,

1998)

• Legal regime– IP protection (Gilson, 1999; Lerner, 2002; Bigus, 2004)– Ease of incorporation (Djankov et al, 2002)– Personal bankruptcy law (Fan and White, 2003; Georgellis and

Wall, 2002; Persad, 2004)



• Bankruptcy Law (US)– Berkowitz and White (2004) Fan and White (2003)– Georgellis and Wall (2002)– Persad (2004)

• Prior empirical work does not– Consider international differences – Consider role of ‘fresh start’


Hypothesis

“Relaxing severity of personal bankruptcy law will stimulate entrepreneurship”

Severity ≈ time to discharge (if any), exemptions, disabilities


Intuitions

1. Marginal entrepreneurs (Adler et al, 2000)– Insurance– Incentives– US evidence: Fan and White, 2003; Georgellis and Wall, 2002;

Berkowitz and White, 2004; Persad, 2004.

2. Inframarginal entrepreneurs– Bad projects vs bad luck– Budget constraint vs deadweight loss


Summary of Key Results

00Income – Capital Gains Tax

00Patents (lagged)

--Bankruptcy Law(low #s better)

00Time Trend

00Internet Bubble

0+GDP Growth

+0MSCI Stock Market Returns

Compendia Self Employment Data

Eurostat Self Employment Data


Methodology (1)

• Dependent variables– Self Employed / Population (EUROSTAT)– Self Employed (inc. owner-managers) / Work Force

(COMPENDIA)

• Specification (Judge et al, 1988)– Country fixed effects – Data de-trended


Methodology (2)

• Explanatory variables– Time to discharge (or life expectancy)

– Stock market returns– GDP growth– ‘Internet Bubble’ (2000-2002)– Income – Capital Gains Tax– Patents (lagged)– Time Trend


Irela

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Finl

and

Bel

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K

Sw

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Aus

tria

Net

herla

nds

Fran

ce

Den

mar

k

Ger

man

y

US

Por

tuga

l

Italy

Spa

in

Real GDP Growth

Time to Discharge in Bankruptcy / 1000

Self Employment / Population0

0.02

0.04

0.06

0.08

0.1

0.12

Averages1990 - 2002

Figure 2. Self Employment / Population, 1990 - 2002


Table 2. Summary Statistics

0.0560.056# Start-up Procedures < 6.5-4.628***

0.0483.074***

0.064# Start-up Procedures > 6.55

0.0550.055Fresh start available-3.000***

0.0503.045***

0.064No fresh start4

0.0520.060All Other Years (1990-2002)0.061

0.0530.053

0.060Years 1999 and 2000 Only3

0.0530.053MSCI Index Return < 0-0.568

0.0522.659***

0.060MSCI Index Return > 02

0.0520.059Real GDP Return < 00.126

0.0520.374

0.060Real GDP Return > 01

Difference TestAverage ValueDifference TestAverage Value

Self Employment/PopulationAll Countries, Excluding Italy,

Portugal, and Spain

Self Employment/PopulationFull Sample Including All

CountriesTest #


-8.66-8.67-8.66-8.67-8.68-8.69-8.68Akaike Information Statistic

866.18865.86864.71864.34864.34864.28862.22Loglikelihood Function

437.51460.54481.70509.41***542.44***579.21***608.06***F-Statistic

0.980.980.980.980.980.980.98Adjusted R2

195156180195195195195Number of Observations

-5.34E-05Time Trend

-8.55E-04-0.00097*Dummy for 1999 and 2000

1.42E-041.19E-041.02E-04Income - Capital Gains Tax

1.84E-08-4.78E-08-7.83E-08-4.98E-09Patents

4.14E-035.00E-035.67E-034.24E-034.22E-03MSCI Index

0.02978**0.02797**0.02137*0.02197*0.02195*0.02246*Real GDP Growth

-0.000116***-0.000108***-0.000095***-0.000095***-0.000095***-0.000093***-0.000091***Time to Discharge

YesYesYesYesYesYesYesCountry Fixed Effects?

Model (7)Model (6)Model (5)Model (4)Model (3)Model (2)Model (1)

EUROSTAT DATA

Table 4. Regression Analyses of Self Employment / Population


-6.81-6.71-6.71-6.72-6.73-6.72-6.73Akaike Information Statistic

379.67373.09372.12371.94-9.56369.60369.30Loglikelihood Function

166.03***155.15***162.15***172.56***182.42***189.77***203.50***F-Statistic

0.970.970.970.970.970.970.97Adjusted R2

105105105105105105105Number of Observations

-0.00075***Time Trend

-0.00064-0.00333Dummy for 1999 and 2000

0.00015-0.00014-0.00023Income - Capital Gains Tax

0.0000001-0.000001-0.000001*-0.000001**Patents

0.08503*0.061020.08251*0.08524*0.07675*MSCI Index

-0.02273-0.02146-0.05767-0.06146-0.06258-0.03529Real GDP Growth

-0.00034***-0.00022***-0.00019***-0.00019***-0.00018***-0.00015***-0.00016***Time to Discharge

YesYesYesYesYesYesYesCountry Fixed Effects?

Models (7)Model (6)Model (5)Model (4)Model (3)Model (2)Model (1)

COMPENDIA DATA

Table 5. Further Robust Checks: Regression Analyses of Self-Employed Business Owners / Total Labour Force


Economic Significance

• We show that changes in bankruptcy laws in Europe in the 1990s are consistent with an increase in self employed / population of, e.g.

• 0.008 in Germany (9% of the average self-employment rate in Germany)

• 0.009 in the Netherlands (8% of the average self-employment rate in the Netherlands)


Implications

• General– Personal bankruptcy law matters for entrepreneurs– In our study, its economic significance is greater than GDP

growth and stock market returns.

• For recent law reforms– UK reforms likely to stimulate entrepreneurship– US reforms the reverse

• NB Limitations / caveats: – Impact on consumer bankruptcies– Welfare implications ambiguous

bankruptcy law and entrepreneurship · 2018. 5. 31. · – personal bankruptcy law believed to be...

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